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URL:  https://boards.fool.com/hillenbrand-3q12-review-x-post-30184855.aspx

Subject:  Hillenbrand 3Q12 Review (X-Post) Date:  8/3/2012  12:59 PM
Author:  TMFTenacious Number:  50 of 69

Here's my take on Hillenbrand's third quarter, cross-posted from MDP.

High-Level Takeaways (scroll down for more detail)


When I outlined potential risk factors for Hillenbrand (NYSE: HI), I never considered that people might stop dying. But North American death rates fell for the third consecutive quarter, dragging down sales and profitability at Hillenbrand's Batesville Casket segment.

As we learned from the Final Destination quadrilogy, while death can be deferred, it cannot be avoided indefinitely. Eventually, death rates will revert to the mean, and many of the deceased will be buried in Batesville's products. In the meantime, Batesville is streamlining its operations to remain profitable during the downturn, but still retain the ability to ramp up production when demand returns.

The bottom line is I'm not at all concerned about Batesville. This segment will continue producing free cash flow for a long, long time, which Hillenbrand will redeploy into businesses with superior growth prospects.

Speaking of which...


Hillenbrand's Process Equipment Group continues to kick butt. This segment enjoyed revenue growth of 53% over the prior-year period (5% organic growth), and backlog grew 3% during the quarter to $140M. The Process Equipment Group now represents nearly 40% of total revenue, and over a third of total EBITDA.

Growth may slow in the short-term due to the global economic malaise and shifts in the U.S. energy sector, but I'm very excited about this segment's long-term potential.


The Foolish Bottom Line
Despite macro headwinds, Hillenbrand continues to execute well, taking costs out of its operations, and positioning the company for long-term growth. I continue to believe that this is a well-run company trading at a very attractive price.



Detailed Takeaways


Process Equipment Group

Great growth from the Process Equipment Group (53% overall, 5% organic). PEG now contributes nearly 40% of total revenue and more than 33% of total EBITDA. This segment also adds nice geographic diversity -- 17% of total revenue now comes from outside the U.S.


There is obviously much uncertainty due to deteriorating economic conditions in Europe and China. However, the PEG is seeing strong growth in China -- simply because it hasn't had much of a presence there until very recently.


Domestically, businesses is softening a bit. The U.S. has been switching power generation from coal to natural gas. Since PEG sells equipment that crushes big chunks of coal into tiny pieces, this has impacted results. Much of that business is higher-margin spare parts -- as you might imagine, machinery that crushes coal tends to wear out quickly.


While demand for coal is weak in America, it is picking up in China and Russia. This is an encouraging sign.


And the shift to nat gas isn't all bad. Drilling for nat gas drives use of proppants -- and PEG sells equipment that produces those proppants. And thanks to cheap nat gas prices, U.S. plastics production should increase, which gives PEG extra upside.


Basically, PEG has its fingers in a lot of pies. Strong demand in certain areas will compensate for weaker demand elsewhere.



Batesville

Fewer people dying is good news for humanity, but bad news for Batesville. Additionally, the ongoing shift to cremation continues to impact sales. Management estimates that the cremation rate increased by about 160 bps, slightly higher than the long-term trend of 120 bps.


Margins for this segment came in well below historical levels. Batesville is seeing "a substantial level of discounting from our competitors" due to excess inventory throughout the industry.


I love this quote: "we are not going to let our business erode, nor are we going to give it away. Batesville's management team has taken swift and thoughtful actions that reduce costs and preserve the high-quality standards to which they are committed and that their customers deserve."


Batesville is restructuring (consolidating shifts, cutting workforce) to cope with the lower levels of demand. The company expects to realize annual savings of about $5M, and claims that it will still be able to respond quickly when demand returns. I love this organization's commitment to lean, efficient business.



Acquisitions

An acquisition is coming; it is just a matter of time. Management will reallocate the cash flows from Batesville to opportunities that provide greater growth opportunities and geographic diversification. I bet we'll see a tuck-in acquisition that will add a new product or geographic territory to the PEG.


Management continues to carefully evaluate potential acquisition candidates. They're dedicated to finding the right fit -- both from a business and cultural perspective. "We are kissing a lot of frogs."




Thanks for reading,

Rich
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